When two or more people invest in real estate, there are many
options for holding title, ranging from joint tenancy to partnerships,
LLCs, and other entities. To select the right form of ownership, you
need to consider a variety of business, tax, and liability issues.

This article provides a brief overview of the most common options.
Joint TenancyIn a joint tenancy, two or more people own equal, undivided interests in the property. The main advantage of this form of ownership
is the right of survivorship: If one owner dies, his or her share passes
automatically to the surviving owners, without the need for a will or
probate. Also, an individual joint tenant can trade his or her interest
in a tax-free Sec. 1031 exchange. Partners, shareholders, and limited
liability company (LLC) members generally can't complete a 1031
exchange of their interests in the entity (although the entity can
complete an exchange of the underlying real estate).

There are several disadvantages, though:

* Each joint tenant is assumed to have an equal share, so
there's no flexibility in allocating capital and profits interests.

* The owners must share control: Sales and other actions require
the consent of each joint tenant.

* Each joint tenant is "jointly and severally liable" for
the mortgage and other property-related debts. In other words, if the
other parties don't pay, you're personally liable for the
entire amount.

* There may be negative tax consequences when an interest passes
through right of survivorship.

Tenancy-in-Common

This form of ownership provides a simple, effective way for
multiple real estate investors to pool their resources. Each
tenant-in-common owns a separate, undivided interest in the property.
This means that each co-tenant has the right to possess the entire
property and co-tenants cannot exclude each other from the property.
Tenancy-in-common interests need not be equal--typically, they're
in proportion to an owner's capital contribution--and there's
no right of survivorship (unless the parties agree otherwise). Owners
are free to sell their interests, borrow against them, use them in a
1031 exchange, or pass them on to their heirs. A transferee becomes a
co-tenant along with all the other co-tenants.

Tenants-in-common share profits and losses according to their
respective interests. Generally, they're liable only for their
share of property-related expenses and debt, unless the co-tenants agree
otherwise. Typically, lenders require co-tenants to assume joint and
several liability for the mortgage.

A disadvantage of tenancy-in-common is that co-tenants have a
limited ability to conduct business as a group. Otherwise, they risk
being treated as a partnership.

General Partnership

Holding real estate as a partnership is more complicated and
expensive than joint tenancy or tenancy-in-common. Because a partnership
is a separate legal entity, you'll have to draft a partnership
agreement, file various documents with the state, and file annual
partnership income tax returns. But partnerships offer several
significant advantages. They're "pass-through" entities,
so there's no entity-level tax. Instead, all income, loss,
deductions, and credits are passed through to the individual owners and
reported on their tax returns.

Partnerships also offer a great deal of flexibility to allocate
profit and loss according to criteria other than ownership interest. For
example, suppose that Adam, Brian and Carl form a partnership to own and
manage a rental property. Adam and Brian each contribute 40 percent of
the capital. Carl contributes only 20 percent but agrees to manage the
property. Although Carl has a 20-percent capital interest, the partners
can agree to allocate more of the partnership's profit or loss to
Carl in exchange for his services.

Another big advantage of partnership is that partners can often
deduct losses that exceed their investments in the partnership. The
reason for this is that a partner's tax basis generally is
increased by his or her share of the partnership's debt. If the
real estate is refinanced, any additional mortgage debt increases the
partners' basis, and the refinancing-proceeds can be distributed to
the partners tax-free to the extent of their basis. C corporations and S
corporations don't provide this advantage. Limited partnerships and
LLCs do, although the benefits may be limited under certain
circumstances.

The biggest disadvantage of partnership is that partners are
personally liable (jointly and severally) for the partnership's
debts. C Corporation

C corporations offer two main advantages:

* Liability protection-A shareholders' liability is generally
limited to his or her investment in the corporation; and

* Ease of transferability --It's generally easier to transfer
stock than it is to transfer a partnership interest.

But these advantages come at a steep price: Corporate profits are
taxed twice--once at the entity level (corporate income taxes) and again
when profits are distributed to shareholders as dividends. Also, unlike
partnerships, corporations have no flexibility to separate capital and
profits interests, and shareholders receive no current benefits from the
corporation's losses, credits, or other tax attributes.

S Corporation

An S corporation combines the liability protection of a corporation
with the pass-through tax treatment of a partnership. But while it
avoids double taxation, shareholders are restricted in their ability to
take advantage of corporate losses and tax credits and, like a C
corporation, there's no flexibility in allocating profit and loss.
In addition, S corporations have a number of tax disadvantages,
including restrictions on the number and type of shareholders.

Limited Partnership

Limited partnerships also combine liability protection with
pass-through tax treatment. Although general partners remain personally
liable, a limited partner's liability is generally limited to his
or her investment in the partnership. A limited partnership has a
partnership's flexibility in allocating capital and profits
interests, but limited partners are strictly limited in taking advantage
of partnership losses and tax credits.

Another disadvantage is that limited partners cannot participate in
managing the partnership in any meaningful way without losing their
liability protection.

LLC

In recent years, the LLC has become a popular entity for holding
real estate. It comes closer than other pass-through entities to
combining corporate limited liability with the lax advantages and
flexibility of a partnership. LLC "members" are shielded from
personal liability regardless of their level of involvement with
management. And LLCs have a partnership's flexibility in allocating
profit and loss.

Also, as in a partnership, LLC members can deduct losses that
exceed their investments in the entity. To fully deduct losses, however,
LLC members may need to take additional steps to ensure their share of
debt is "at risk." There are several ways to do this,
including pledging non-business property as collateral for the mortgage
or structuring the mortgage as "qualified non-recourse
financing."

Consult Your Advisors

These are some of the options available for owning real estate.
Others include tenancy by the entirety (which offers creditor protection
for married couples), trusts, and real estate investment trusts (REITs).
Your advisors can help you determine which form of ownership is
best-suited to your needs.

BY: MARC WIEDER, CPA, PARTNER--ANCHIN, BLOCK & ANCHIN LLP

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